New kind of Net betting seeks converts during tourney

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March 14, 2003 — Just as college players aim to use the NCAA basketball tournament as a springboard to the NBA, online gambling companies are hoping that “March Madness” will propel a new form of online sports betting into American living rooms. Known as person-to-person betting — or P2P — the system works like a financial market to match bettors with opposing views on the outcome of a sporting event, an efficiency that offers improved odds by all but eliminating the middle man.

P2P betting already is all the rage in Europe, where industry leader Betfair.com says it arranges 12,000 wagers per minute at peak times. But most companies making P2P plays in Europe and other markets have declined to take wagers from American bettors, fearful of running afoul of a federal law that bars the use of telephone lines to bet on sports contests.

But at least two companies are overlooking such legal niceties in hopes of knocking down a slam-dunk in the lucrative U.S. market. And “March Madness,” which has developed into the second biggest American sports betting event after the Super Bowl, comes at a perfect time for them.

“March Madness is going to be huge,” said John Delaney, CEO of year-old TradeSports.com, one of the companies hoping that Americans will embrace the concept of betting against one another instead of the house. While declining to predict just how huge, Delaney says he expects about 80 percent of the site’s current 9,000 members and several thousand new customers to wager on the NCAA games.

Simon Noble, CEO of BETWWTS.com in Antigua, which is showcasing its newly revised P2P platform by waiving all trading commissions through the end of March, said the financial market model is a perfect fit for the Internet.

“It’s a killer application,” he said. “Anything that’s been achieved before will pale in comparison.”

Supply and demand sets odds
In the European form, P2P betting functions just like a financial exchange, with the laws of supply and demand setting the odds as opposed to a bookmaker. This offers the bettor several advantages, including odds that are in most cases better than those found in traditional sports books and the ability to hedge, or lessen risk, by placing counterbets while a contest is in progress.

But the system also can glaze the eyes of players more accustomed to plunking down $20 on Duke to beat Syracuse by at least 7 points.

On TradeSports.com, for example, a bettor who thinks Duke will beat Syracuse by at least 7 points — the “spread” imposed by bookmakers to give each team an equal chance of winning — would “buy a contract” on the Blue Devils.

The basic contract unit is $10, but the trade price fluctuates until the contract expires - in this case at the final buzzer - depending on the market’s view of the probability of the outcome. The contract trades on a 0-to-100 system, with each “tick” up or down representing a 10 cent shift in value.

So, for example, a contract on Duke purchased before the game at an “ask” price of 53 points ($5.30) will be worth either $10 or nothing when the contract expires at the end of the game, depending on whether Duke wins and covers the spread or not.

If Duke took an early lead, the contract could soar to a “bid” price of 68 points ($6.80), at which time the bettor would have the option of selling the contract for a quick $1.50 profit or holding it in hopes of cashing out for the full $10 at the game’s conclusion.

On the other hand, if Duke’s Dahntay Jones sprained his ankle in the opening minutes of the game, the value of the contract could plunge to a “bid” price of 26 points ($2.60), leaving the bettor with the dilemma of either selling immediately and absorbing a $2.70 loss or holding onto the contract in hopes that Duke can beat the Orangemen by 7 points without their star swing man.

With the typical P2P bettor purchasing and selling tens or hundreds of contracts at a time, serious money hangs on such decisions.

An advantage for the bettor
TradeSports charges a commission of 4 cents per contract on both the purchase and sale, which typically amounts to 1 to 1 ½ percent of the amount wagered. Coupled with the typical 2 percent spread between the “bid” and “ask” prices, this means the bettor is facing “vigorish” of about 3 ½ percent instead of the roughly 10 percent advantage that bookmakers typically try to maintain, according to Delaney.

Despite the price advantage for the player, operators of brick-and-mortar sports books aren’t worried that customers will desert them for P2P sites.

“It really is a whole new market,” said Bob Scucci, sports book manager at the Stardust Casino in Las Vegas. “It’s the whole yuppie market, people who weren’t necessarily sports bettors before who can tie in their knowledge of computers and stock trading. … I really like it as a different thing from what we’re doing.”

BETWWTS came to a similar conclusion after it introduced its P2P exchange last year, noting that recreational bettors were reluctant to try European-style P2P wagering because of its unfamiliarity, said Noble. In hopes of broadening its P2P customer base and add crucial liquidity to the “market,” the site is using March Madness to debut its revised person-to-person wagering platform. Instead of the 0-to-100 format, the new interface uses traditional sports book-style odds lines while still allowing bettors to trade while play is in progress and to wager on “both sides” of an event.

‘A new style of betting'
“It’s a new style of betting for many American customers, so the idea is to lower the barriers of understanding,” said Noble.

Given the financial underpinnings of P2P, it’s not surprising that many early adherents in the United States are sports bettors who cut their teeth on the stock and bond trading floors.

“The great thing is you can trade while the game goes on … and you’re trading with individuals, not a sports book that’s all loaded up on one side,” said Mike King, a 48-year-old bond trader with more than 20 years experience on the New York and Chicago trading floors.

After learning about TradeSports.com through an ad, King said he used his expertise in stock analysis to “crunch” 20 years worth of sports data and establish probabilities for specific situations, such as how often a favored football team trailing by less than 7 points at the end of the third quarter will come back to win.

He then put the data to use, starting out with a bankroll of between $15,000 and $20,000 and a well-crafted money management strategy.

“I’m up 28 percent already this year,” he said. “That beats the stock market by a long shot.”

In addition to offering sports bettors a new way to play, P2P betting adds a novel element to the long-running debate over the legality of Internet gambling. In essence, the practice begs the question of whether a P2P site is violating the U.S. Wire Act — which prohibits the use of telephone lines for the transmission of wagers or betting information - since it is providing a service or venue for bettors but not directly participating in the transaction.

Legal status unclear
While the question is rhetorical for P2P purveyors like BETWWTS, which also offers traditional sports betting on the Internet that courts have determined violates the law, it is vital for TradeSports.com.

Delaney, the company’s CEO, said the firm’s attorneys have concluded that the company is not violating the Wire Act because the company “isn’t a bookmaker.”

“TradeSports is licensed and legally operating as a service provider out of Ireland,” said Delaney, adding that he frequently travels to the United States on business trips without fear of arrest.

But Betfair, the British P2P heavy-weight that has expanded to Sweden, South Africa and Hong Kong, reached the opposite conclusion.

“Our advice was that we almost certainly would be in breach of U.S. laws … if we adopted a policy of accepting bets from Americans,” said Betfair spokesman Mark Davies.

U.S. gambling experts interviewed by MSNBC.com also said the TradeSports argument would be unlikely to fly in a court of law.

“State laws and possibly federal law would say they are in the gambling business because they are assisting people in making bets and obviously they’re going to make money from it,” said I. Nelson Rose, a professor at Whittier College School of Law and an expert on gambling and the law.

Anthony Cabot, a Las Vegas lawyer and author of “The Internet Gambling Report,” agreed that TradeSports would likely lose such a case if it came to trial. But he noted that the company’s legal argument closely resembles the stance that Internet auction giant eBay has taken in arguing that it is not responsible for illegal transactions that occur on its site because it merely provides a venue — a defense that has withstood several legal challenges.

The 'facilitator' argument
“They don’t accept wagers,” he said of TradeSports. “What they do is facilitate the transmission of information between two parties who are engaged in the betting transaction. They can legitimately argue, ‘I’m in the business of facilitating transactions.’”

A Justice Department spokeswoman declined to comment on whether a company offering P2P wagering would be in violation of the Wire Act.

Even if the Wire Act was found not to apply to P2P betting, operators of such sites could soon face another legal roadblock.

Sen. John McCain, R-Ariz., is expected by many observers to reintroduce legislation to ban betting on college sports. Along with other anti-gambling legislation - including a bill that would cut off the use of credit cards and other financial instruments for Internet gambling - the measure is seen as having a better chance of winning approval in Congress than it has in previous years.

McCain argues that the legal betting on amateur sports at hundreds of Nevada casinos feeds illegal betting on campuses and on the Internet, leads to corruption of college athletes and turns students into problem gamblers.

But King, the bond trader/sports bettor, said that argument and others advanced to support legislation aimed at cracking down on gambling are disingenuous.

“I bristle when they call trading on sports gambling but trading (stock) futures investing,” he said. “The states aren’t concerned about gambling additions or money laundering and game fixing, they are concerned about protecting revenue from the lottery and other state-run games.”